Capital allowances: depreciating asset - use of a mining, quarrying or prospecting right

Are the mining, quarrying or prospecting rights that a taxpayer holds 'used' for the purpose of working out the decline in value of the assets under Subdivision 40-B of the Income Tax Assessment Act 1997 (ITAA 1997), in circumstances where the taxpayer meets State Government legal obligations imposed on holders of the assets by making them available to another entity to use, pursuant to the terms of a joint venture agreement.

Yes. The mining, quarrying or prospecting rights that a taxpayer holds have been 'used' by the taxpayer for the purpose of working out the decline in value of the assets under Subdivision 40-B of the ITAA 1997 in these circumstances.

All legislative references are to the ITAA 1997 unless otherwise stated.

The taxpayer is the trustee of a Creditors' Trust which was created upon the discharge of a Deed of Company Arrangement (DOCA) entered into by a company under external administration.

Under the terms of the Creditors' Trust and the DOCA, the company transferred assets to the taxpayer which included interests in certain Exploration Licences. The interests in the Exploration Licences are mining, quarrying or prospecting rights. These are intangible assets that are depreciating assets within the meaning of subsection 40-30(2). The taxpayer holds the mining, quarrying or prospecting rights under item 5 of the table in section 40-40.

The taxpayer is required to meet State Government legal obligations imposed on holders of mining, quarrying or prospecting rights. The taxpayer meets these legal obligations by making the mining, quarrying or prospecting rights available to another entity to use, pursuant to the terms of a joint venture agreement. The other entity carries out the exploration work necessary to meet the taxpayer's prescribed minimum expenditure commitments and ensures that all other relevant legal obligations attached to holding the mining, quarrying or prospecting rights are met.

The taxpayer intends to sell the mining, quarrying or prospecting rights. When the taxpayer sells the mining, quarrying or prosecting rights, the taxpayer will stop holding the assets and a balancing adjustment event will occur under section 40-295.

Subsection 40-60(1) provides that a depreciating asset starts to decline in value from when its start time occurs. For a holder of a depreciating asset, the start time of the asset is when the holder first uses the asset, or has it installed ready for use, for any purpose (subsection 40-60(2)).

In order to determine whether the decline in value of the mining, quarrying or prospecting rights is worked out under Subdivision 40-B, and consequently, whether a balancing adjustment amount arises under section 40-285 upon the sale of the mining, quarrying or prospecting rights by the taxpayer, it is necessary to determine whether those assets have been used, or installed ready for use, for any purpose by the taxpayer.

In Council of the City of Newcastle v. Royal Newcastle Hospital (1957) 96 CLR 493 at 515, (the Newcastle Hospital Case ) Taylor J stated: The word "used" is, of course, a word of wide import and its meaning in any particular case will depend to a great extent upon the context in which it is employed. The uses to which property of any description may be put are manifold and what will constitute "use" will depend to a great extent upon the purpose for which it has been acquired or created.

In the context of Subdivision 40-B, the use of a depreciating asset requires the employment of the asset in such a way that it can reasonably be expected to decline in value through and over the time of that use.

The degree of physical or active use that is required to constitute use will depend to a certain extent on the nature of the asset and the purpose for which it is created or acquired. For a tangible depreciating asset, physical or active employment of the asset would generally be expected in order for an asset to be considered to be 'used'. For an intangible asset that is a depreciating asset, employment of the asset may not be physical and the asset may be considered to be 'used' in the context of passive use.

In considering the nature of the use of an intangible asset that is a depreciating asset the Commissioner is of the view that exploitation of the inherent character of the asset would generally be expected.

The particular mining, quarrying or prospecting rights held by the taxpayer are interests in Exploration Licences. Such Exploration Licences allow a holder to explore for mineral deposits in a particular area defined by each Exploration Licence. Exploitation of the inherent character of these mining, quarrying or prospecting rights would require, at a minimum, that the taxpayer use the mining, quarrying or prospecting rights to explore for mineral deposits. This would provide the necessary connection between the use of the mining, quarrying or prospecting rights and a reasonable expectation of their decline in value through that use.

In this case, the taxpayer meets the legal obligations imposed by the State Government by making the mining, quarrying or prospecting rights available to another entity to use, pursuant to the terms of a joint venture agreement. Under the joint venture agreement, the entity carries out the exploration work necessary to meet the prescribed minimum expenditure commitments and ensures that all other relevant legal obligations attached to holding the mining, quarrying or prospecting rights are met.

As noted above by Taylor J in the Newcastle Hospital Case , the word 'used' is a word of wide import. In that case 291 acres of timbered land surrounding a hospital was held to be 'used' for hospital purposes. The evidence did not indicate any physical use of the land by hospital staff or patients. However, the land was held to be used by the hospital as a barrier to air and noise pollution and in providing surroundings to patients. The decision of the High Court in this case was affirmed on appeal by the Privy Council in Council of the City of Newcastle v. Royal Newcastle Hospital (1959) 100 CLR 1.

Use of assets in the context of passive use was also considered by the High Court in Tourapark Pty Ltd v. Federal Commissioner of Taxation (1982) 149 CLR 176; 82 ATC 4105; (1982) 12 ATR 842 (the Tourapark Case ), where Gibbs CJ pointed out that a person may be said to use property for his own purposes by making it available for use by others.

In the Tourapark Case , Gibbs CJ stated at CLR 181, ATC 4107, ATR 844: "A person who owns land may be said to use it for his own purposes notwithstanding that he permits someone else to occupy it, even under a lease": Ryde Municipal Council v. Macquarie University (1978) 139 CLR 633, at p.638; although the owner does not put his land to "active, personal use", he may use it by making it available for use by others - ibid. at p. 647.

In this case, the taxpayer makes the mining, quarrying or prospecting rights available to another entity to use, pursuant to the terms of a joint venture agreement. The other entity conducts the exploration required to meet the State Government legal obligations. In making the Exploration Licences available to the other entity and thereby meeting State Government legal obligations imposed on holders of Exploration Licences the taxpayer is exploiting the inherent character of the mining quarrying or prospecting rights that it holds.

The Commissioner is of the view that such employment of the mining, quarrying or prospecting rights by the taxpayer is accepted as 'used' in the context of passive use discussed by the High Court in the Newcastle Hospital Case and the Tourapark Case .

It is therefore considered that the mining, quarrying or prospecting rights have been 'used' by the taxpayer for the purpose of working out the decline in value of the assets under Subdivision 40-B.